Q&A: Why Did You Buy THAT?

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Q & A: Why Did You Buy THAT?

by Charles Lewis Sizemore, CFA

Once in a while, I have a client ask why I bought a particular stock. While that kind of question might make some managers defensive, I welcome it. It keeps me sharp, and it give me an opportunity to reevaluate the investment. If I can’t answer the question effectively… well… perhaps that’s not a stock I should own after all!

A client wrote in with the following question about McDonalds (MCD): “Hi Charles, regarding your McDonalds stock purchase, all that I have read is that this is not a great stock.  At $97.00 I am sure you could have bought something far better. Please explain your thinking. Thank you.”

Very valid question. McDonalds is not a popular stock right now, and the company has been getting terrible press. Here is my response:

Regarding McDonalds, there are a few things to keep in mind. By all means, there is always “opportunity cost,” or the risk that we could have made more money buying something else. We run that risk with anything we buy, though we certainly try to keep it to a minimum by being selective and buying quality stocks at good prices.

In the case of McDonalds, I believe we are actually getting a very good price on a very good company. McDonalds is going through a transition right now, just as they have multiple times in their multi-decade past. In the early 2000s, you heard a lot of the same arguments you hear today: That McDonalds is an old company with a tired menu that has fallen behind the times.Well, from 2003 to 2011, McDonalds made improvements to its business and the stock went from $14 per share to over $100 per share. The stock hasn’t budged since 2011, as investors have grown cold towards it again. As a value investor, I like to see that. At current prices, we’re getting one of the most adaptable companies in US history trading at a nice 3.5% dividend yield. And while I don’t expect McDonalds’ dividend growth to be as aggressive as it was in the last decade given its current payout ratio, it’s worth noting that McDonalds is one of the most shareholder friendly stocks in America with a long history of rewarding its shareholders with very handsome dividend hikes.

And finally, I consider MCD a nice diversifier. In a portfolio that is heavily invested in real estate and pipelines, a consumer-focused, recession-resistant stock like McDonalds is a nice complement.

Thank you,
Charles

This article first appeared on Sizemore Insights as Q&A: Why Did You Buy THAT?